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Trading activity, risk aversion, and risk neutral skewness: Evidence from SSE 50ETF option

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  • Jiang, Zhengyun
  • Zhou, Xin

Abstract

This paper utilizes a unique database to investigate how trading activity affects risk-neutral skewness (RNS), and how risk attitude affects the return predictability of RNS in China SSE 50ETF option market. We find that the individual investors’ option trading activities play a dominant role on RNS. Furthermore, results show that individual investors prefer to trade deep OTM (out-of-the-money) options in earlier periods and switch to ATM (at-the-money) options in later periods. These findings suggest that option investors are relatively less risk averse in earlier periods. We then find that RNS negatively predicts future returns of the underlying 50ETF only when investors are risk loving in earlier periods. In contrast, the relation between RNS and subsequent underlying returns in later periods becomes positive when investors become less speculative.

Suggested Citation

  • Jiang, Zhengyun & Zhou, Xin, 2024. "Trading activity, risk aversion, and risk neutral skewness: Evidence from SSE 50ETF option," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 378-399.
    • Handle: RePEc:eee:reveco:v:91:y:2024:i:c:p:378-399
    DOI: 10.1016/j.iref.2024.01.033
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    More about this item

    Keywords

    Risk neutral skewness; Return predictability; Risk aversion;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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